FREUDENBERG-NOK P.LTD,MOHALI V. ADDL.CIT, SPECIAL RANGE-8, NEW DELHI

ITA 2088/DEL/2023

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Freudenberg-NOK Pvt. Ltd., engaged in manufacturing oil seals for the automobile sector, appealed against the order of the Commissioner of Income Tax (Appeals) which upheld the disallowance of a portion of royalty expenses claimed as revenue expenditure. The Assessing Officer had disallowed Rs. 77,15,500/- from the total royalty paid, categorizing it as capital expenditure. The Tribunal dismissed the appeal, referencing previous cases involving the same parties and issues, and noted that the principle of consistency in tax treatment was not violated as similar royalty expenses had been accepted as revenue expenditure in subsequent years.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 312245 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-04-2025
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2016-2017
• Other Referred Cases: Empire Jute Co. Ltd. 124 ITR 1 (SC), Assam Bengal Cement Companies Ltd. 27 ITR 34, Hero Honda Motors Ltd. 372 ITR 481, Southern Switchgears 232 ITR 272 (Mad.)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR DHANESTA
• Assessee Lawyers: KARANJOT SINGH
• Keywords: Opportunity of being heard; Additional evidence; Revenue expenditure; Depreciation; Rule of consistency; Tax effect; Capital expenditure; Principle of natural justice; Royalty expenses
• Section: 143(3); 37

Judgement Text

" 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘B’: NEW DELHI BEFORE SHRI YOGESH KUMAR U.S., JUDICIAL MEMBER AND SHRI AVDHESH KUMAR MISHRA, ACCOUNTANT MEMBER ITA No.2088/Del/2023, A.Y. 2016-17 Freudenberg-NOK Pvt. Ltd. Village Basma, PO-Banur, Mohali PAN: AAFCS0306K Vs. Addl. Commissioner of Income Tax, Special Range-8, New Delhi (Appellant) (Respondent) Appellant by Sh. Karanjot Singh, Advocate Sh. Shivam Gupta, Advocate Respondent by Sh. Rajesh Kumar Dhanesta, Sr. (DR) Date of Hearing 28/01/2025 Date of Pronouncement 28/04/2025 ORDER PER AVDHESH KUMAR MISHRA, AM This appeal of the assessee for the Assessment Year (hereinafter, the ‘AY’) 2016-17 filed by the assessee is directed against the order dated 25.05.2023 passed by the Commissioner of Income Tax (Appeals), NFAC, New Delhi [hereinafter, the ‘CIT(A)’]. 2. The assessee, vide 8 grounds and its sub-grounds, has raised following issues: - i. Non affording proper opportunity of being heard, ITA No.2088 /Del/2023 Freudenberg-NOK 2 ii. Taxability of royalty of Rs.77,15,500/- holding it as capital expenditure and also denying depreciation thereon. iii. Chargeability of interest under section 234A, 234B, 234C and 234D of the Income Tax Act, 1961 (hereinafter, the ‘Act’). iv. Initiation of penalty under section 270A of the Act. 2.1 Grounds relating to the chargeability of interest under section 234A, 234B, 234C and 234D of the Act and the initiation of penalty under section 270A of the Act, being consequential and premature respectively, do not require specific adjudication; hence, these grounds stand dismissed. General grounds also stand dismissed. Thus, remaining grounds revolve around the sole issue of taxability of royalty, which we have been tasked to decide here. 3. The brief facts of the case relevant for deciding this appeal are that the assessee, engaged in the business of manufacture and sale of oil seals to automobile sector (Oil seals are used in automobile components and other machinery to prevent leakage of oil and other fluids running through machineries, etc), filed its Income Tax Return (hereinafter, the ‘ITR’) on 30.11.2016 declaring income of Rs.45,91,08,430/-. The case was picked up for scrutiny. Consequential assessment was completed under section 143(3) of the Act determining income at Rs.46,68,23,930/-. The Assessing ITA No.2088 /Del/2023 Freudenberg-NOK 3 Officer (hereinafter, the ‘AO’) disallowed Rs.77,15,500/-; i.e. 25% of royalty of Rs.3,25,00,865/- paid to Freudenberg Sealing Technologies GMBH & Co. KG, Germany, erstwhile Freudenberg Dichtungs-und Schwingungstechnik KG, (hereinafter, the ‘FDUSG') and NOK Corporation, Japarn (hereinafter referred to as NOK'). 4. The Ld. Counsel submitted that the appellant was never show- caused to justify the royalty expenditure. Therefore, the AO had made part disallowance out of royalty expenses without affording any opportunity of being heard against the principle of natural justice. Thus, the Ld. Counsel prayed for setting aside the impugned order. 4.1 The Ld. Counsel contended that the AO’s finding that the royalty expenditure would provide enduring benefits to the assessee; hence, part of this expenditure needed to be capitalized being capital expenditure nonallowable under section 37 of the Act. The Ld. Counsel drew our attention to the Article-2 to emphasize that the assessee had right to manufacture the licensed products. But it did not own the technical information that was why it had not the right to transfer technical information or sub-licensed it to third parties. The assessee had paid the royalty @ 2.5% and 3% of the net sales in terms of the Article 6 of the Agreements. The Article 10 of the Agreements provided for the obligation of the licensor to continuously provide the appellant assessee all ITA No.2088 /Del/2023 Freudenberg-NOK 4 improvements, modifications in the technical information. The Article 11 of the Agreements dealt with the time duration of the Agreement and the conditions under which the Agreements could be terminated at the instance of the licensor. It, inter-alia, provided the duration of the Agreements which was fixed for an initial period of seven years; however, the same was extendable as per mutual consensus between the appellant assessee and the licensor. The Article 12 of the Agreements broadly dealt with the effect of termination of the Agreements. In terms of clause (1) and clause (3) of the Article 12, the appellant assessee, on expiration, had to continue to use the technical information on a royalty free basis and may retain the technical information. 4.2 The Ld. Counsel submitted that the royalty was paid for the right to use the technical information to manufacture the Licensed Products. It was contended that the ownership of such technical information always remained with licensor. Therefore, the technical information utilized by the appellant assessee for the purposes of its business on royalty payment was revenue expenditure deductible under section 37 of the Act. It was further argued that the technical information utilized by the assessee for its manufacturing business did not result any enduring benefit; hence, the royalty payment was revenue expenditure deductible under section 37 of the Act. Reliance was placed on the decisions of the Hon'ble Supreme ITA No.2088 /Del/2023 Freudenberg-NOK 5 Court in the case of Empire Jute Co. Ltd. 124 ITR 1 (SC) and Assam Bengal Cement Companies Ltd. 27 ITR 34. 4.3 The Ld. Counsel submitted the Ld. CIT{A) erred in upholding the assessment order placing reliance of the Tribunal order in assessee’s own case for the AYs 2003-04, 2004-05 and 2005-06. However, the Ld. CIT(A) erred in upholding the assessment order without appreciating that in the subsequent years from AY 2007-08 till AY 2015-16, the AO accepted the royalty expenditure as revenue expenditure. Thus, he contended that the royalty expenditure should have been allowed as revenue expenditure in term of principle of consistency. ln this regard it was submitted that the Tribunal had wrongly erred to hold that there was no evidence on record to show that the technology in oil seals changed so fast that the residual benefit was illusory. The Ld. Counsel filed an affidavit in the form of an additional evidence to buttress the fact that the technology in oil seals had changed very fast. It was submitted that the appellant assessee introduced certain new products and take off certain product from the market to keep pace with the changing market demand. 4.4 The Ld. Counsel drew our attention to the decision of the Hon’ble Delhi High Court in the case of Hero Honda Motors Ltd. 372 ITR 481 on progressive interpretation of the identical terms of the Agreement. The Ld. Counsel argued that the assessee had not absolute right to use the ITA No.2088 /Del/2023 Freudenberg-NOK 6 technical information for ever after termination of the agreement. There were certain riders in case of termination of the agreement due to specific conditions. In case of the breach of contract, no such clause was there. It was submitted that the Tribunal had arrived at the conclusion that the facts of the Southern Switchgears 232 ITR 272 (Mad.) were identical to the facts of the appellant assessee's case. However, the Ld. Counsel argued that the facts of the case of Southern Switchgears were distinguishable from the present case in hand. The Ld. Counsel humbly submitted that the judgment of Supreme Court in Southern Switchgear was applied mechanically by the Tribunal to the facts of the case in hands. 4.5 The Ld. Counsel, at the outset, contended that the AO had taxed the royalty in AYs 2003 04 to 2006-07. However, no addition on the score of royalty was ever made in AY 2007-08 till AY 2015-16. Therefore, following the principle of consistency, the issue of royalty needed to be decided in the appellant assessee favour. 5. On the other hand, the Ld. Sr. DR submitted that this case was squarely covered by the decision of the Tribunal in assessee’s own case. That was why it withdrew its appeal filed before the Hon’ble High Court (ITA Nos. 80/2009, 649/2009 and 1046/2010 order dated 24.04.2019) on the reasoning of low tax effect. In principle, the assessee had accepted the Tribunal orders. Hence, he prayed for dismissal of appeal. ITA No.2088 /Del/2023 Freudenberg-NOK 7 6. We have heard both parties and have perused the material available on record. We find merit in the arguments of the Ld. Sr. DR. The factual matrix of the case has been thread bare in details from all angles in the assessee’s own cases in ITA Nos. 1118/Del/2007, 287/Del/2008 and 2789/Del/2009 by the Tribunal. All the above arguments of the Ld. Counsel had been dealt except that of principle of the consistency. Before us, the Ld. Counsel did not bring copy of any scrutiny assessment order passed under section 143(3)/144 of the Act by the AO wherein the AO had given the categorical finding that the royalty expenditure was revenue expenditure. Further, the principle of res judicata does not apply to income tax cases. Thus, we hold that the argument of consistency does not have much force and thus, the same is of no help to the assessee. It is not profitable to build a case by quoting some part/sentence, etc. of the decision out of context without bringing full facts on the record. The case has to be appreciated in totality. 7. We have given a thoughtful consideration to the entire facts of the case and submissions/contentions/arguments of both parties and are of the considered view that this case is squarely covered by the decision of the coordinate bench of Tribunal in the assessee’s own cases in ITA Nos. 1118/Del/2007, 287/Del/2008 and 2789/Del/2009. We therefore, following the reasoning given by the coordinate bench of Tribunal in the assessee’s own cases in ITA Nos. 1118/Del/2007, 287/Del/2008 and ITA No.2088 /Del/2023 Freudenberg-NOK 8 2789/Del/2009, uphold the impugned order of the Ld. CIT(A). We therefore, decline to interfere with the finding of the Ld. CIT(A). 8. In the result, appeal of the assessee stands dismissed as above. Order pronounced in open Court on 28th April, 2025. Sd/- Sd/- (YOGESH KUMAR U.S.) (AVDHESH KUMAR MISHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 28/04/2025 Binita, Sr. PS Copy forwarded to: 1. Appellant 2. Respondent 3. CIT/PCIT 4. CIT(Appeals) 5. Sr. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI "